On July 22, 2014, two U.S. Courts of Appeals highlighted both the science and the art of statutory construction and interpretation — and came to very different conclusions. These courts were asked to consider an IRS rule (26 C.F.R. § 1.36B-2(a)(1)) associated with a section of the Affordable Care Act that provides tax credits (subsidies) for those who purchase health insurance under the exchanges. The central issue was whether the relevant provision of the ACA (26 U.S.C. 36B(c)(2)(A)(i)) (the provision), which provides that subsidies would be available to those “enrolled through an Exchange established by the State,” limits the subsidies to those who purchase their policies from state-based exchanges or if they also extend to policies purchased under the federal exchange.
The U.S. Court of Appeals for the D.C. Circuit split 2-1 in its opinion in Halbig v. Burwell. The D.C. Circuit panel held that the provision was unambiguous based on a plain reading of the provision on its face — i.e., subsidies were limited to state-based exchanges. The court noted that while the federal government is allowed to set up an exchange “‘within the state,’ it does not in fact stand in the state’s shoes when doing so.” Therefore, according to the D.C. Circuit, the subsidies do not apply.
In addition to the impact on individuals, this ruling has potential to allow employers to escape the “employer mandate” and associated penalties. Mandate penalties are levied on employers if: (1) the employer fails to provide the required minimum health benefits; and (2) the employer has employees who receive a subsidy. It seems, then, that if employees can’t receive subsidies under the federal exchanges, an employer would not be subject to penalties. Thirty-six states currently operate under the federal exchange. The U.S. government has stated that it will appeal to the full U.S. Court of Appeals for the D.C. Circuit.
Later that day, the U.S. Court of Appeals for the Fourth Circuit issued a unanimous opinion in King v. Burwell. In this case, the plaintiffs argued for a plain reading of the statutory provision, while the government argued that when reading the provision in the context of the entire law, one should interpret the provision to include the federal exchanges. The Fourth Circuit concluded there was ambiguity in the statute, but that the IRS Rule was based on “a permissible construction of the statute.” In holding that the IRS Rule should be upheld, the Fourth Circuit stated that it was “primarily persuaded by the IRS Rule’s advancement of the broad policy goals” of the ACA. The Fourth Circuit found the tax subsidies to be an integral part of the ACA and noted that in light of the number of states that chose not to establish their own exchanges, they carried even greater importance.
This issue may very well be the next issue associated with the Affordable Care Act to go before the Supreme Court given both the Circuit split and the potential impact to employees and employers. If subsidies are only permitted for individuals who purchase from state-based exchanges, this could have a fundamental impact on further implementation of the ACA.